News Column

Fitch Affirms Holy Redeemer Health System, PA's Revs at 'BBB-'; Outlook Stable

June 9, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by Montgomery County Higher Education and Health Authority on behalf of Holy Redeemer Health System (HRHS).

--$54.1 million series 1997A;

--$29.6 million series 2006A.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross receipts of the obligated group.

KEY RATING DRIVERS

PROFITABILITY DECLINE: The system reported a loss from operations through the third quarter of the current fiscal year ended March 31, 2014 (the interim period) of $3.9 million. Factors contributing to the loss included lower than budgeted volumes, increased expense of physician alignment and losses at a New Jersey home health agency acquired in 2012. Based on anticipated revenue adjustments in the fourth quarter, management projects that the loss will be reduced to just under $1 million by year end.

SOLID LIQUIDITY MAINTAINED: The decline in operating results is partially offset by HRHS's very good liquidity metrics with 203 days cash on hand (DCOH), 12.9x cushion ratio, and 146% cash to debt, all slightly improved over the prior year and stronger than the 'BBB' rating category medians.

REVENUE DIVERSIFICATION: Fitch views the system's diversified service lines, which include acute care, long-term care, and robust home care presence as a credit strength, providing an attractive platform for population based health care delivery and a potential partnership with a larger organization.

ELEVATED DEBT BURDEN: The system's debt burden is elevated with maximum annual debt service (MADS) equal to 4.1% of revenues, compared to the category median of 3.5%. HRHS's coverage of MADS by EBITDA was 2.6x in fiscal 2013 and 2.1x through the nine-month interim period ended March 31, 2014, lower than the category median of 3.1x. The obligated group's coverage in 2013 was 2.9x as per its bond covenant calculation.

RATING SENSITIVITIES

CONSISTENT PERFORMANCE AT RATING LEVEL: Fitch expects HRHS to maintain performance in line with its audited performance and an increase operating losses with a negative impact on EBITDA debt service coverage, or deterioration of the solid liquidity position, may lead to downward rating pressure.

CREDIT PROFILE

HRHS's obligated group consists of Holy Redeemer Hospital and Medical Center (HRHMC, 242 licensed-bed acute care hospital in Meadowbrook, PA, approximately 20 miles from downtown Philadelphia), two long-term care facilities, Home Care and Hospice in Pennsylvania, and HR Physician Services. The consolidated system includes a number of non-obligated entities including home care agencies and senior living facilities. In fiscal 2013, the consolidated system had $359.5 million of revenues; the obligated group accounted for approximately 78% of total system revenues and 80% of system assets. Fitch's analysis considers the consolidated audited financial statements which include both obligated and non-obligated group entities.

The affirmation of the 'BBB-' rating and the Stable Outlook is based on HRHS's solid liquidity position and revenue diversification, which serves to offset the weak operating performance. Fitch's additional concerns include the competitive northeast Philadelphia service area for HRHMC, a somewhat elevated debt burden for the system, and high exposure to governmental payers related to the system's senior living component.

PROFITABILITY DECLINE

HRHS's operating margins have been thin for the last four years - typically under 1%; fiscal 2013 (year-end June 30) ended with operating income of $1.4 million, equal to operating margin of 0.4% and operating EBITDA margin of 7.7%, both lower than the 'BBB' category medians of 1.8% and 9%, respectively. The operating loss through the third quarter of fiscal 2014 was $3.9 million, higher than the loss for the same period last year - $2,9 million, but certain insurance reserve adjustments, as well as approximately $1 million of additional Electronic Health Record meaningful use funds are expected to reduce the operating loss to be close to the budgeted $0.9 million. The system typically only books certain revenue adjustments in the fourth quarter. The obligated group finished fiscal 2013 with a breakeven operating performance, a decline for from the prior year's $3.1 million gain from operations and reported an operating loss of $4 million through the third quarter of 2014.

A major contributor to the profitability erosion is the increased expense stemming from physician recruitment and the investment in the integrated clinical network Innovate Wellness Alliance (IWA), which now includes 68 physicians and is instrumental HRHS's participation in an ACO jointly owned by Mainline Health (45%), Jefferson Health (45%) and HRHS (10%). The physician subsidy through the third quarter of 2014 was $5.3 million, compared to $2.4 million in fiscal 2013. Also contributing to the lower profitability are lower than anticipated hospice volumes and the losses incurred by VNA Home Care of Mercer County, which was acquired in July 2012 and has had a slow start up with unbudgeted one-time expenses and management turnover. Occupancy of long term care units is relatively stable with the exception of independent units at Lafayette Redeemer. Management is planning to convert several of the ILU's into smaller, more affordable units, for which there is higher demand.

ELEVATED DEBT BURDEN

The system generated coverage of MADS by EBITDA of 2.6x in fiscal 2013 and 2.1x through the nine-month 2014 interim period. The $14.7 million MADS includes debt outside of the obligated group, including a recently entered into long term lease for the Provincialate (the Mother House of the Sisters of Holy Redeemer) located across from the HRHMC campus, which may be used for administrative space and ultimately house outdated SNF beds located at St. Joseph Manor (the approximately $8 - 10 million project would not likely start before 2015). MADS does not include two bullet maturities for entities outside of the obligated group due in 2015 ($4.2 million) and 2017($8.1 million), which are expected to be refinanced. The inability to refinance the bullets, which would place pressure on HRHS' liquidity, would be viewed negatively. The obligated group had debt service coverage of 2.9x in 2013 as per its bond covenant calculation. The system's capital budget approximates its depreciation expense, which was $20 million in 2013.

SOLID LIQUIDITY MAINTAINED

Partially offsetting Fitch's concern with the slim operating results and elevated debt burden is HRHS's ability to maintain and even slightly grow liquidity. The $189.3 million of unrestricted cash and investments at March 31, 2014, is an increase from $171.6 million at 2013 fiscal year end and translates to 202.6 DCOH, 12.9x cushion ratio and cash to debt of 145.8%, better than the 'BBB' category medians of 144.7 DCOH, 10.2x cushion and 91.7% cash to debt. The system's investment portfolio has a relatively aggressive asset allocation with 30% in alternative investments and private equity. Offsetting this concern is the system's conservative debt structure with very small variable rate exposure (all outside of the obligated group) and no exposure to derivatives.

DISCLOSURE

HRHS covenants to provide audited annual financial statements within 120 days of each fiscal year end and quarterly disclosure within 60 days of each fiscal quarter end. Quarterly disclosure consists of management discussion, balance sheet, income statement, cash flow statement, and utilization statistics.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'Nonprofit Hospitals and Health Systems Rating Criteria'(May 20, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833656

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Eva Thein

Senior Director

+1-212-908-0674

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Dmitry Feofilaktov

Analyst

+1212-908-0345

or

Committee Chairperson

Emily Wong

Senior Director

+1-415-732-5620

or

Media Relations

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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